Corporate Accounting Unit 5/8

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Underwriting

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The process where an individual or institution agrees to purchase a specified number of shares or debentures in exchange for a fee, known as the underwriting commission.

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Underwriting Agreement

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An arrangement, commonly used by public companies during an initial public offering (IPO), that ensures if the public does not fully subscribe to the offered shares or debentures, the underwriters will step in to buy the remaining securities.

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77 Terms

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Underwriting

The process where an individual or institution agrees to purchase a specified number of shares or debentures in exchange for a fee, known as the underwriting commission.

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Underwriting Agreement

An arrangement, commonly used by public companies during an initial public offering (IPO), that ensures if the public does not fully subscribe to the offered shares or debentures, the underwriters will step in to buy the remaining securities.

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Underwriting commission

The compensation provided to underwriters for their role in underwriting shares or debentures of a public company, calculated based on the issue price of the securities underwritten.

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Advantage of Underwriting

Guarantees the sale of shares and debentures, ensuring the company's capital subscription is certain.

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Complete Underwriting

The entire issue of shares or debentures of a company is underwritten by one or more underwriters.

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Partial Underwriting

Only a portion of the issue of shares or debentures is underwritten.

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Pure/Open Underwriting

Underwriters agree to take up shares or debentures of a company only if the public does not fully subscribe to them.

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Firm Underwriting

Underwriters commit to purchasing a specific number of shares or debentures from the company, regardless of the public subscription.

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Underwriters

Individuals or institutions responsible for underwriting public issues of shares and debentures, required to hold a certificate issued by SEBI to act in this capacity.

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Sub-underwriters

Underwriters appointed by the primary underwriter to assist them in their tasks and do not have a direct contract with the company.

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Brokers

Assist in selling shares or debentures but do not guarantee the purchase of any unsubscribed shares, receiving brokerage as compensation.

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Liability of underwriters

The obligation to subscribe to a specific number of shares as stipulated in the underwriting agreement, classified into Gross liability and Net liability.

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Gross liability

The obligation underwriters have to sell a certain number of shares to the public, as specified in the underwriting agreement.

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Net liability

The number of shares each underwriter must purchase when the public does not fully subscribe to the offering.

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Marked Applications

Applications that bear an underwriter's stamp, allowing the company to identify which underwriter is responsible for each application.

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Unmarked Applications

Applications that do not bear any underwriter's stamp and are submitted directly to the company by the public.

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Firm Underwriting Applications Credit Given

Credit assigned to individual underwriters, which is first deducted from their gross liability, later added back after determining the underwriter's liability

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Firm Underwriting Applications Credit Not Given

Applications treated as unmarked applications if firm underwriting credit is not assigned to individual underwriters.

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IPO (Initial Public Offering)

The first time a company offers its shares to the public on the stock exchange.

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AOA (Articles of Association)

A legal document that contains the rules and regulations governing the internal management of a company.

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Register

An official list or record maintained by a company or organization.

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Prospectus

A legal document issued by a company that provides details about its business operations, financial performance, management team, and the securities being offered to the public.

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Private Equity

Investments made in privately held companies that are not publicly traded on the stock exchange.

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Debenture

A long-term security yielding a fixed rate of interest, issued by a company as a funding option to avoid diluting equity.

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Debenture (as per Companies Act, 2013)

Includes Debentures Stocks, Bonds, or any instrument evidencing a company's debt, whether constituting a charge on assets or not.

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Objectives of Debentures

Raising capital, leveraging benefits without diluting ownership, providing fixed interest payments, offering tax benefits, attracting investors, providing flexible terms, improving creditworthiness, and maintaining control.

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Unsecured Debentures

Debentures with no security regarding principal and unpaid interest; also called simple debentures.

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Secured or Mortgage Debentures

Debentures secured by a charge on the company's assets, giving holders the right to recover their principal and interest from mortgaged assets.

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Redeemable Debentures

Debentures issued for a fixed period, where the company agrees to repay the borrowed amount on a certain date.

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Non-Redeemable Debentures

Debentures that do not hold the issuer liable to repay in full by a certain date; also known as perpetual debentures.

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Registered Debentures

Debentures issued to holders registered with the company, not negotiable and requiring a regular instrument of transfer.

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Bearer Debentures

Debentures not registered with the issuer, easily transferable by delivery, with the owner (bearer) entitled to interest.

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Convertible Debentures

Debentures that can be converted into equity shares after a specified period.

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Non-Convertible Debentures

Traditional debentures that cannot be converted into equity, typically offering a higher interest rate.

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First Debentures

Debentures that are repaid before other debentures.

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Second Debentures

Debentures that are paid after the first debentures are paid back.

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Issue of Debentures

Similar to the issue of shares, involving a prospectus, application invitations, and allotment based on conditions; can be issued for cash or other considerations.

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Writing off Discount on Issue of Debentures

Typically treated as a capital loss or fictitious asset, written off over the debentures' lifetime, charged to Securities Premium A/c or Profit and Loss A/c.

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Fixed Installment Method (Discount on Issue)

Spreading the total discount equally over the life of the debentures, writing off a fixed amount each year.

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Fluctuating Installment Method (Discount on Issue)

Writing off the discount in proportion to the debentures outstanding at the beginning of each year, diminishing over time.

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Debenture Deed

Certificate issued under company seal which is a certificate of debt with the date of redemption and amount of repayment mentioned on it

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Redemption of Debentures

The process of repaying the debenture holder.

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Debenture

Debt instrument used by a company to raise capital by borrowing money from the public.

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Redeem Debentures at Par

Repayment of debenture happens at the face value of the debenture.

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Redeem Debentures at Premium

Repayment of debenture happens at a higher amount than the initial issued amount.

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Lump-Sum Payment on a Prefixed Date

Debenture holders receive the promised sum on the prefixed date.

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Payment in Annual Installment

Companies pay a portion of a debenture’s principal each year to holders until its maturity date.

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Call Option

Enables companies to purchase their debenture either before or on the maturity date at a predetermined price.

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Put Option

Debenture holders have the right to sell the debenture back to the company at an agreed price, either before or on the maturity date.

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Conversion into Shares

Enables holders to convert their units into the company’s ordinary equity shares.

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Buy from the Open Market

Companies can purchase debentures from an open market if their units are being traded on a regulated exchange.

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Cumulative Sinking Fund

A popular type of sinking fund where the interest earned on sinking fund investments is also reinvested again.

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Non-Cumulative Sinking Fund

The interest earned on sinking fund investments will not be reinvested again.

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Sinking Fund Account

Reserve that is built by accumulating at least 25% of the face value of debenture every year until its maturity.

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Sinking Fund Investment Account

The investments made every year with the amount of annual appropriation will be debited to this account.

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Interest on Sinking Fund Investment Account

Every year the interest received on Sinking Fund Investments will be credited to this account.

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Insurance Policy Method

A fixed amount of premium is paid every year to the insurance company to take provision for redemption of debentures.

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Open Market

Purchasing own debentures from the stock market.

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Goodwill

An intangible asset associated with the purchase of one company by another, representing a competitive advantage.

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Accounting Standard (AS-10)

Requires goodwill to be recorded in the books.

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Goodwill definition

The portion of the purchase price that is higher than the sum of the net fair value of all the assets purchased in the acquisition and the liabilities assumed in the process.

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Negative Goodwill

Arises when the acquiring company pays less than the target’s book value in a distress sale. In other words, purchased the company at a bargain.

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Intangible Asset

An asset that is not physical, like buildings or equipment (e.g., goodwill).

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Super Profits

Excess of profits over the normal profits earned by similar firms in the industry.

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Premium Method in Accounting

Used when a new partner brings in cash against goodwill, which is then adjusted in the old partners’ capital accounts.

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Revaluation Method in Accounting

Allows a newcomer to become a partner without paying for goodwill, but the goodwill is worked out, valued, and adjusted to the old partners' capital accounts in the old profit-sharing ratio.

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Memorandum Revaluation Method

The newcomer does not bring in any amount as goodwill. The goodwill is first raised by crediting the old partners’ capital accounts in the old profit-sharing ratio and after the admission, the goodwill is written off among all the partners, including the new partner, in the new profit-sharing ratio.

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Average Profit Method

A simple method for calculating goodwill where past profits are averaged and multiplied by the number of years of purchase.

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Weighted Average Profit Method

A modified version of the simple average profit method, used when profits show a continuous increasing trend over the years.

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Super Profit Method

Compares the average/real profits with the normal profit for the same capital in the same type of business.

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Capitalization Method

Goodwill Calculation either by capitalization of Super Profit or Average Profit.

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Annuity Method

Method of goodwill valuation that takes into account the loss of interest on the amount paid for goodwill. The amount paid for the goodwill in lump sum will be recovered in the coming years

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Purchase Method

When payment is made in excess of net assets acquired for that purpose; such excess payment is known as Purchased Goodwill.

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Non-Purchased Goodwill/Inherent/ Latent Goodwill

Internally generated goodwill and it arises over a period of time due to the good reputation of a business.It is not purchased for cash consideration. Hence it is not recorded in the books of accounts like Purchased Goodwill.

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Purchase Consideration

The amount payable by the purchasing company to the vendor company for taking over the assets and liabilities of Vendor Company.

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Current Assets

It refers to the assets of a company which can be converted into cash in any given fiscal year such as cash, cash equivalents, accounts receivable, stock inventory, marketable securities, pre-paid liabilities, and other liquid assets.

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Capital Employed

The total funds deployed for running the business with the intent to earn profits and is usually calculated by adding working capital to fixed assets.